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Coastal Financial Corp., the parent company of Coastal Community Bank, identified a material weakness in its internal controls over financial reporting related to interest income and banking-as-a-service expenses for certain BaaS partner loans, it disclosed this week.
Additionally, the company noted incorrect accounting for expense reimbursements, where it functions as an agent, according to a Securities and Exchange Commission filing Monday.
The Everett, Washington-based company’s audit committee determined this month that while the accounting errors had no impact on consolidated pre-tax income, net income, or retained earnings, they caused an overstatement of assets and liabilities on the balance sheet and affected the cash flow statement's operating and investing activities.
“The important takeaway is that these adjustments relate to accounting matters and were offsetting,” Coastal CEO Eric Sprink told American Banker via email, noting that the adjustments have no impact on the company’s net income, earnings per share, or the core performance metrics. “Additionally, we've implemented enhanced policies to ensure clearer alignment in accounting treatment going forward, and we're confident this will simplify future financial reporting.”
“We consider these actions our final resolution of this matter,” Sprink told the publication.
After consulting management and independent auditors, the board of directors concluded that previously issued financial statements should no longer be relied upon due to accounting errors. That includes 2023’s annual report and quarterly reports for the first three quarters of 2024.
The accounting errors included misstatements in interest income and BaaS loan expenses due to policy differences between the company and its BaaS lending partners. Coastal Community adjusted by decreasing both interest and fees on loans and BaaS loan expenses, along with related balance sheet accounts.
Additionally, the company reported BaaS partner interchange fees on point-of-sale transactions on a gross basis in both non-interest income and non-interest expense when they should have been recorded on a net basis in non-interest expense only, as the company was acting as an agent.
Coastal Community corrected this by reducing reimbursement of expenses in non-interest income and correspondingly decreasing point-of-sale expenses in non-interest expense, according to the SEC filing.